- Identify the business purpose of the transaction. It’s important to have a plan for growth and that plan should certainly acknowledge the role that an acquisition or merger might play in meeting growth goals. However, many business combinations fail because the buyer is too committed to making a transaction happen even when the numbers don’t align with the growth plan. If your growth strategy includes an M&A component, make sure your executives are clear on how they expect the combined entity to meet the growth goals. In short, don’t acquire or merge because your plan says you will or because you feel like you have to do it to stay competitive. Stay ready for the opportunities that make your business better and negotiate terms that help you reach your goals.
- Build your transaction team. An M&A transaction will most likely require the expertise of professionals who focus on transaction advisory services. Unless you’re a private equity or venture capital firm, it’s unlikely that these types of transactions are part of the regular course of your business. Similarly, the advisors who support your day-to-day operations may not have the experience necessary to handle transaction details. Your team should include:
- Transaction attorney. Your general counsel probably isn’t the person who can manage the complicated terms and provisions of a business combination. You need an experienced transaction attorney on board early in the process, definitely before any letter of intent is prepared.
- Transaction accountant. This person will help to identify the uncertainties that can make a seemingly attractive target a risky bet. By cleaning nonrecurring items out of EBITDA and evaluating claims for potential future revenue streams, this professional gives you a clearer picture of whether this target meets your business purpose.
- Valuation specialist. This service could be wrapped in with the transaction accountant or may be a separate provider. The owner(s) of a business will almost invariably assume it is worth more than the numbers show. A valuation expert can evaluate things like goodwill and other intangibles to help you develop a more compelling case for your offer.
- What’s the plan? Find out what your target’s growth plan is for the next five years and evaluate it. Past performance can help identify an attractive target, but a well-prepared, documented and substantiated plan can help seal a deal. Does it identify the effects of potential law and regulation changes, as well as different economic scenarios? While no plan can realistically cover all contingencies, you want to know that the target is prepared to adapt to potential changes in the operating environment.
- Develop a clear picture of what your post-transaction business will look like. This comes back to staying focused on the business purpose of the transaction. You will want the combined business to perform at a certain level to meet your growth goals. Will you need the executive team to stay in place? Are they looking to this transaction as an exit strategy in the hope of retiring? If you want some or all of them to stay, does your offer include the compensation and incentives needed to keep them motivated?
Every transaction will include its own specific set of challenges that you and your team will need to address. But if you follow this checklist and stay focused on your goals, the right acquisition can be an important component of your growth strategy.